Another angle on inequality

Most discussions on inequality focus on income, and pre-tax income at that.

There is another angle on the topic:

. . . If you measure consumption inequality, it is far lower than pre-tax income inequality, because the top 40 per cent of earners pay more in than they get out, while the bottom 60 per cent get more out than they pay in. Indeed, in Britain the top 1 per cent generate about 30 per cent of the total income-tax haul. After such redistribution, the richest fifth of the population has only four times as much money to play with as the poorest fifth. . . .

This comes from a post by Matt Ridley who points out that poverty and inequality are both falling.

. . .  by any conceivable measure, absolute poverty has fallen dramatically over the past few decades, so why should it matter if the rich get richer? Today’s British poor spend half as much of their income on food and clothing as in the 1950s, while working many fewer hours, living about eight years longer and having access to phones, cars, medicines and budget airlines that would have amazed even the rich in the 1950s.

Moreover, here’s a question I’m willing to bet that chimpanzees would do better than people at: given that inequality has been rising recently in China, India, America and many other countries, is global inequality rising or falling?

The answer: it’s falling and has been for several decades, however you measure it. The reason is that people in poor countries are getting richer more quickly than people in rich countries are getting better off.

That fall in global inequality has accelerated since the start of the financial crisis. As Africa now experiences record rates of growth, the number of people trying to live on $1.25 a day is plummeting fast. Mr Rosling likes to show two charts in his talks: the graph of global income was once a two-humped camel; now it’s a one-humped dromedary, with the vast majority of the world’s people in the middle.

Here’s another question that I fancy the chimps would beat the people at: did poverty and inequality in Britain increase or decrease as a result of the recession? The answer is that both fell. Inequality has fallen to levels not seen since the mid 1990s, as it usually does during recessions, though it is still higher than it was in the 1970s. Meanwhile the Left’s favourite measure of poverty — those earning less than 60 per cent of the median income — has by definition gone down, because median income has gone down. Redefining poverty in this relative (and very inadequate) way has therefore rather backfired. . .

A percentage of median income is a very blunt instrument with which to measure poverty because a fall in the incomes of higher earners will improve the measure but make absolutely no impact on the problem.

As poverty and inequality improve the differences between rich and poor become less obvious:

Imagine being told that one of the people in a meeting is a genuine billionaire (I owe this idea to Professor Don Boudreaux). How would you tell which one? His bodyguards, private jets and grouse moors are outside the room; his shirt and jeans are unlikely to give him away (as they would in 1900); his Rolex could be a cheap imitation; his teeth, girth and height are probably unremarkable (unlike in 1800); even his Diet Coke is the same as everybody else’s. Much more than in the past, most inequality in this country these days — though by no means all — is in luxuries, rather than necessities.

That helps to explain why some welfare is now directed at people who already have more than enough, though it doesn’t make it any more right.

. . .  does income generally grow faster for people in the lowest fifth of the population or people in the highest? It’s the lowest, because many of those people are young, low-paid people just starting out on their careers, while many of the richest fifth are older people at the peak of their pay, about to retire. That is to say, the category “poorest fifth” may not seem to show much change, but the people in it do. Income mobility is far from dead: 80 per cent of people born in households below the poverty line escape poverty when they reach adulthood.

Mobility is very important. It’s not just how much people have which matters but the ability for those with less to get more.

But why, when both poverty and inequality are declining are both regarded as more serious issues?

None of this is meant to imply that people are wrong to resent inequality in income or wealth, or be bothered about the winner-take-all features of executive pay in recent decades. Indeed, my point is rather the reverse: to try to understand why it is that people mind so much today, when in many ways inequality is so much less acute, and absolute poverty so much less prevalent, than it was in, say, 1900 or 1950. Now that starvation and squalor are mostly avoidable, so what if somebody else has a yacht?

The short answer is that surely we always have and always will care more about relative than absolute differences. This is no surprise to evolutionary biologists. The reproductive rewards went not to the peacock with a good enough tail, but to the one with the best tail. A few thousand years ago, the bloke with one more cow than the other bloke got the girl, and it would have cut little ice to try to reassure the loser by pointing out that he had more cows than his grandfather, that they were better cows, or that he had more than enough cows to feed himself anyway. What mattered was that he had fewer cows.

For some the problem isn’t how much they have but that others have more.

If they use that to motivate themselves to improve their situation that can be good.

If it just makes them resentful and feel they’re owed more, even if they have enough, it’s  merely envy.

Hat Tip: Anti Dismal

5 Responses to Another angle on inequality

  1. Gravedodger says:

    Using 60% of the median wage as a foundation block for measuring needs and wants is fools gold.

    Even if the government took much higher taxes and gave significantly more welfare out, there would still be a totally erroneous 60% marker in existence.

    Calling it a poverty measure is totally irrelevant as Ridley points out.
    His parable on cows is very topical and rates right up there with the Ant and The Grasshopper, also the ten men of differing means who met up for lunch on a weekly basis until sharing a discount from the provider blew the idyllic right of mateship out of the water.

  2. Dave Kennedy says:

    Some other statistics:
    Almost 20% of New Zealanders are unemployed or under-employed (NZ underemployment rate one of the highest in OECD).

    2/3 of New Zealand’s richest declared an income of less than $70,000 on their tax returns:

    Our highest tax rate is lower than in Australia and our lowest rate is higher.

    Our poorest pay GST on almost all purchases, our richest only pay GST on around 50% of purchases.

    The bottom 20% of income earners have seen their relative income drop since the 80s

    New Zealand currently has one of the fastest growing inequity of income in the OECD. Since the 80s the annual average change for the lowest decile is 1.1% while the top decile is 2.5%, more than twice as much.

    In 2013 50% of new New Zealanders had incomes of less than $24,000.

    Those on the lowest incomes pay more for power supply.

    Around $3 billion a year is spent on Working for Families to subsidise wages.

    We now have a growing demographic called the ‘working poor’ that are presenting in larger numbers to food banks:

    I also recommend “Inequality, A New Zealand Crisis” edited by Max Rashbrooke.

  3. Paranormal says:

    DK said: “Our poorest pay GST on almost all purchases, our richest only pay GST on around 50% of purchases.” One could go further and suggest 85% of all statistics are made up. That one clearly is made up.

    As for “2/3 of New Zealand’s richest…” So what. Define richest. Does it perhaps include assets? At present New Zealand doesn’t tax assets for the very good reason that such a tax would be counter productive for the economy.

    As for giving free stuff away, of course there will be a never ending demand for that.

    What would be better would be means testing and budgeting advice, That would help people manage their incomes and expenses and help improve their situations.

    But actually asking people to take responsibility for themselves is anathema to you isn’t it. That would destroy your voter base.

  4. Dave Kennedy says:

    You may be right with the GST one, Paranormal, I couldn’t find a link to verify it but had it explained to me a while ago and couldn’t find the source, a fair cop. It probably does include assets as you say. This is all I could find just now that provides a GST perspective that suggests those that purchase goods from different sources can avoid GST:

    I think you should talk to your local food bank and budget advisors and I think you will find that many people who use both often don’t lack budgeting skills as much as just not earning enough to comfortably get by. Try surviving on an income of less than $24,000 a year as 50% of people do ($460 per week).

  5. Paranormal says:

    It’s about choices isn’t it DK.

    I’ve seen the people regularly lining up at the Auckland City Mission (our office is just down the road). Most are smoking, a significant number have tattoos, and the vast majority are obese. Whilst there will be those that have fallen on hard times, that our welfare state should be there to catch, there are far too many using it as a lifestyle choice. My own family members included. And that’s where the free bits come in. There is an endless demand for free stuff. Sir Apirana Ngata was so right about the welfare state, and not just for his people.

    As for budgeting, New Zealanders at all levels struggle with budgeting, a fact confirmed by budgeting services themselves. We’ve recently used these people:, to help with our household budget We’ve gone from not being able to make ends meet to probably having our mortgage paid off in eight to ten years.

    It’s simple stuff but so many people don’t understand it. As a nation fewer and fewer of us remember living through the thirties and don’t understand that you can’t spend more than you earn. TV One only the other night was talking up the latest Liarbour beat up on power prices for the poor. The fact that the lady of the house had selected the wrong plan for her, as clearly laid out by the power supplier, was never addressed in the article. It was also instructive that they were watching Sky. Our household has a 6 figure income and can’t afford Sky. Go figure.

    As for GST it is a very fair system and most of the things in that item you linked to are really minor bits around the edges that GST misses, and quite frankly are just too administratively expensive to enforce for too little return. Our firm looks after some significantly wealthy individuals. We see the invoices for the toys they buy. I can assure you they are paying significant amounts of GST. There is no way of avoiding it.

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